Shinwha Intertek Corp.'s (KOSDAQ:056700) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Shinwha Intertek's (KOSDAQ:056700) stock is up by a considerable 36% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Shinwha Intertek's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Shinwha Intertek

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Shinwha Intertek is:

2.0% = ₩2.0b ÷ ₩102b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every ₩1 of its shareholder's investments, the company generates a profit of ₩0.02.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Shinwha Intertek's Earnings Growth And 2.0% ROE

It is hard to argue that Shinwha Intertek's ROE is much good in and of itself. Not just that, even compared to the industry average of 8.1%, the company's ROE is entirely unremarkable. Despite this, surprisingly, Shinwha Intertek saw an exceptional 25% net income growth over the past five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Shinwha Intertek's growth is quite high when compared to the industry average growth of 7.7% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Shinwha Intertek's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shinwha Intertek Using Its Retained Earnings Effectively?

The three-year median payout ratio for Shinwha Intertek is 36%, which is moderately low. The company is retaining the remaining 64%. By the looks of it, the dividend is well covered and Shinwha Intertek is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Shinwha Intertek is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

Overall, we feel that Shinwha Intertek certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 4 risks we have identified for Shinwha Intertek visit our risks dashboard for free.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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